Jeff Gelles: Bitter debate among economists? Less than you might think

Justin Wolfers of the Wharton School at Penn says there's accord among most economists.

By Jeff Gelles, Inquirer Columnist

Posted: July 30, 2012

Joblessness stuck above 8 percent. Tepid economic growth. Europe teetering on the brink of recession, or maybe well into the feared double dip.

What do the doctors we turn to in these dire circumstances - the economists who joke about their own profession as the "dismal science" - recommend?

If you listen to most of today's political debates, or at least to the media's recounting of them, you might think the answer is that economists are mired in fundamental disagreement - as though, say, a patient were seriously ill but his physicians couldn't get past a fierce debate over intravenous feeding vs. bloodletting.

But you'd be seriously wrong to draw that conclusion, according to economists such as Justin Wolfers of the University of Pennsylvania's Wharton School, and Swarthmore College's Mark Kuperberg. Both say key rhetoric behind current Republican stances - such as the mantra that 2009's stimulus legislation was a failure - falls well outside the mainstream of economic thought.

Most economists are used to sitting on the sidelines as politicians toss around policy pronouncements with scant regard for the evidence. Outside such government institutions as the Federal Reserve, where every statement must be weighed for its potential to inadvertently move markets, economists rarely have prominent roles in U.S. policy debates.

One exception is Princeton's Paul Krugman, who won a Nobel Prize for his work on international-trade economics and who writes a column for the New York Times. Though hardly a left-wing ideologue, Krugman pays for his outspokenness by serving as a regular punching bag for the right.

But that doesn't mean other economists aren't keenly aware of the mess we're in - a slump unparalleled during most of their lifetimes - or of the policy paralysis in Washington, where Republican economic dogma has helped block almost every proposal to counter the extended slump with additional Keynesian-style stimulus.

That's why Wolfers, for one, has decided to be more outspoken. In a Bloomberg News column last week, Wolfers and his partner, Betsey Stevenson, disputed the idea "that there's a deep disagreement among reasonable people about how to manage the U.S. economy."

Instead, they write, "there's remarkable consensus among mainstream economists, including those from the left and right, on most major macroeconomic issues. The debate in Washington about economic policy is phony. It's manufactured. And it's entirely political."

Wolfers and Stevenson (who served in the Obama administration as the Labor Department's chief economist) back their assertions with data from a survey of about 40 leading economists conducted by the University of Chicago's Booth School of Business. In response to one question, for instance, 92 percent of those surveyed agreed the 2009 stimulus had reduced the jobless rate.

Do all economists agree on everything? Obviously not, and for good reason. Macroeconomics, the study of how overall economies behave, is not a hard science in which experiments can prove or disprove a hypothesis. Instead, it relies on theory, continually refined computer models, and inevitably messy, real-world evidence.

Kuperberg says that, ironically, when the financial crisis hit, many in the profession were working to bridge the sharp divisions that have cleaved macroeconomics since the 1970s. That's when so-called freshwater economists, led by those at the University of Chicago, began pushing the notion that macroeconomics needed to rest more firmly on microeconomics, the theoretical framework for explaining how individuals and businesses behave in the marketplace.

Kuperberg and Wolfers say the crisis has exposed some of the most far-fetched implications of freshwater beliefs in idealized marketplaces - such as the notion that unemployment remains high because people, incentivized by government programs, choose joblessness over work.

"These stories rest on the preposterous idea that these people stopped looking for jobs based on knowing that in a year and half, Congress would pass programs that would make being unemployed less miserable," Wolfers says.

There is sound evidence, Wolfers says, based on Keynesian insights and the post-World War II economic models that virtually all forecasters still rely on, about why employers aren't hiring.

The main impediment is the obvious one: lack of demand, fueled by the financial crisis and Great Recession. As individuals pay down debts they took on during the housing boom, the economy as a whole suffers from what John Maynard Keynes called "the paradox of thrift."

It's a paradox because what's good for each household individually is bad for the economy as a whole. That's a key reason Keynes urged governments to borrow and spend on public investments during depressions - to get the jobless working again, not just for their own benefit but so they would once again have money to spend on goods and services.

Has the economics profession failed in this crisis? That's a point Krugman makes repeatedly as he challenges his adversaries to show models that explain what has happened and show a path forward that doesn't rely on "the confidence fairy" - the belief that economic growth will reemerge when markets finally believe governments are serious about cutting spending and deficits.

Austerity policies have so far failed badly in Europe, Krugman points out. And all those dire warnings in 2009 about the steep inflation sure to follow the $787 billion American Recovery and Reinvestment Act? Yup, it never happened.

Like Krugman, Kuperberg says further deficit spending is crucial because the other key tool for spurring the economy - monetary policy - has lost most traction. The Fed's key short-term rate has been near zero since 2008. As Krugman puts it, expecting rates to spur more growth when they're already near zero is like "pushing on a string."

So what will the economy's doctors - the professionals we rely on - do now? Kuperberg and Wolfers say that, so far, there has been no sign of an epiphany. But neither has given up hope that the crisis will stir serious reexamination.

Meanwhile, the federal government's borrowing costs are at historic lows, and there are nearly 13 million people unemployed, roads and bridges to fix, and teachers and firefighters eager to be called back from layoffs.